Raj Jaiswal - priority sector lending.pdf

Chapter Eleven Advances & Credit Analysis 1
PRIORITY SECTOR ADVANCES
Learning Objectives :
To explain the importance of priority sector
lending under various segments.
Structure:
11.1 Introduction.
11.2 Segments of Priority Sector Lending
11.3 Targets for Priority Sector Lending
11.4 Targets for Foreign Banks
11.5 Deposits by Foreign Banks with SIDBI.

Structure contd.:
11.6 Contribution by Banks to RIDF
11.7 Mode of Disbursement of Loan
11.8 Repayment Schedule
11.9 Rates of Interest.
11.10 Penal Interest
11.11 Service Charges / Inspection Charges
11.12 Insurance Against Fire & Other Risks
11.13 Photographs of Borrowers

11.1 Introduction.
Banks normally finance those who, in their
opinion, are credit worthy.
Those in need of finance like farmers,
small scale units, rural industries are
ignored as they are not
- considered credit worthy.
- accessible.
- well informed.

11.1 Introduction.
The situation will not change so long as profits
were the only measure of the success of the banks.
Hence in 1969, a historic decision was taken
to nationalize the banks to
● take banking to the remotest villages.
● serve un-banked centers
● change the focus of management to
assist priority sector.
● weigh the purpose and nature of borrowing
rather than adequacy of security.

1. Agriculture.
2. Small Scale Industries.
3. Small Road & Water Transport Operators.
4. Retail Trade.
5. Small Business.
6. Professional & Self Employed Persons.
7. State sponsored bodies for backward
classes
8. Education.
9. Housing.

contd.
10 Consumption
11 Loans to NGOs, Self Help Groups [SHGS],
Micro-credit
12 Food & Agro Based Sector
13 Software Industry
14 Leasing & Hire Purchase
15 Loans to urban poor indebted to non-
institutional lenders.

1. Agriculture.
Finance can be direct or indirect.
Ω Direct Finance
● short term loans for raising crops.
● medium & long term loans for
financing production and development.
● construction of farm buildings
● construction & running storage
facilities.

Ω Direct Finance- contd.
● production & processing of hybrid
seeds for crops.
● payment of irrigation charges
● loans for horticulture, dairy,
fishery, forestry etc.
● manufacture of bio gas plants, agri
business centres.

Ω Indirect Finance-
● credit for distribution of
fertilizers, pesticides, seeds etc.
● loans up to Rs 40 lakhs for financing
distribution of cattle feed, poultry
feed, & other inputs.
● loans to electricity boards to
provide low tension connections for
farmers.

Ω Indirect Finance- contd.
● loans to state electricity boards for
rural electrification & improvements.
● loans to farmers through different
bodies.
● deposits held by the banks in Rural
Infrastructure Development Fund [RIFD]
maintained by NABARD.

Ω Indirect Finance- contd.
● investments by banks in special bonds
issued by NABARD with the objective of
financing exclusively agricultural /
allied activities .
● finance for hire-purchase of
agricultural equipment, storage
facilities including cold storage,
silos, tractors, bulldozers.

2.Small Scale Industries
Ω Small scale & ancillary industries.
Small scale industrial units are those
engaged in the manufacture, processing
or preservation of goods with investment
in plant & machinery not exceeding Rs.
one crore.
For certain specified items like
hosiery, hand tools, drugs the limit is
extended to Rs Five crores.

Ω Tiny enterprises.
Small scale industrial units with
investments up to Rs. 25 lakhs are
classified as ‘Tiny Enterprises.”

Ω Small scale service & business enterprises
[SSSBEs].
Industry related service & business
enterprises with investment up to Rs 10
lakhs in fixed assets, excluding land &
building will be given benefits of small
scale sector.
Price for assets paid by original owner is
considered for investment limits.

Ω Investments made by banks in securitized
assets representing direct lending to
the SSI sector would be covered by the
priority sector.

♠ Indirect finance in the small scale
industrial sector includes credit to:
 agencies involved in decentralized
sector in the supply of inputs &
marketing of outputs of artisans,
village & cottage industries.
 government sponsored corporations
providing funds to the weaker sections
of the priority sector .

 advances to handloom coops.
 term finance / loans to SIDC or SFC
for financing SSIs.
 KVIC provided by a consortium of
banks.
 for commercial banks refinancing the
bills rediscounted by SFC or SIDBI
 subscription to bonds issued by NABARD
with the objective of financing non-farm
labour.

 deposits placed with SIDBI by foreign
banks in fulfillment of shortfall in
attaining priority sector targets.
 bank finance to HUDCO as a line of
credit for on-lending to artisans,
handloom weavers etc.
 loans for setting up industrial
estates.

 advances to KVI sector.
 manufacture of common salt by any
process.
 small scale units engaged in ship
breaking / dismantling .
 small scale leaf factories engaged
manufacturing tea.
 water mills

3.Small Road & Water Transport Operators
[SRWTO]
☼ Advances to small road & water
transport operators owning a fleet of
not exceeding ten vehicles, including
one that is being financed.
☼ Advances to NBFCs for on-lending to
SRWTO satisfying priority sector norms

4.Retail Trade
These include advance granted to
☼ Retail traders dealing in essential
commodities & consumer co-op stores.
☼ Private retail traders with credit
limits not exceeding Rs. 10 lakhs.
☼ Retail traders in fertilizers fall
under indirect finance & those of
mineral oils under small business.

5. Small Business
☼ individuals & firms managing business
enterprise established for the purpose
of providing service with capital
equipment not > Rs. 20 lakh.
☼ advances for acquisition, construction,
renovation of house boats & other
tourist accommodation.
☼ distribution of mineral oils.
☼ advances to stamp vendors & lottery
ticket agencies.

6. Professional & Self Employed Persons
Loans to professionals & self employed
persons include
☼ loans for purchase of equipment, tools,
repairs or renovation of premises, &
working capital to accountants,
engineers, solicitors, architects etc.
☼ advances to accredited journalists,
cameramen, who are free lancers.

6. Professional & Self Employed Persons
☼ financial assistance within certain
overall limits & specific limit for
working capital
- to practicing company secretaries.
- to individuals to run “Health
centers”
- to qualified persons to set beauty
parlors
- preference to be provided for
doctors operating in rural areas.

7. State Sponsored Organizations for
Scheduled Castes / Tribes
Advances sanctioned to state sponsored
organizations for scheduled castes /
scheduled tribes for the specific
purpose of purchase & supply of inputs
and the marketing of outputs of the
beneficiaries of these organizations.

8. Education
♠ Educational loans should include only
loans & advances granted to individuals
[ but not institutions] for educational
purposes up to Rs. 7.5 lakhs for studies
in India & RS. 15 lakhs for studies
abroad.
♠ Schemes for the identical purposes
granted by banks under their schemes are
eligible.

9. Housing
Direct Finance.
[i] Loans up to Rs. 15 lakhs in rural / semi
urban, urban & metropolitan areas areas
for construction of houses by
individuals. Loans by banks to their
employees are excluded.
[ii] Loans for house repairs [ up to Rs. one
lakh in rural areas & Rs. two lakhs in
urban]

9. Housing – Direct Finance contd.
[iii] Loans granted by banks up to Rs. 5
lakhs for acquiring / constructing
houses or up to Rs. 50,000/- for their
repairs under Special Rural Housing of
NHB.
[iv] Investment by banks in the mortgage
backed securities that satisfy RBI
conditions, if original loans are direct
housing loans under priority sector,
given by housing finance companies.

9. Housing
Indirect Finance
[i] assistance to any government agency for
construction of houses or for clearance
or rehabilitation of slum dwellers.
[ii] assistance to non-government agency
approved by NHB for refinance for
reconstruction of houses or for slum
clearance & rehabilitation.
Both subject to a ceiling of Rs 5 lakhs per
housing unit

10. Consumption Loans
These relate to loans granted
to the weaker sections of the
community under the
Consumption Credit Scheme.

11. Loans to NGOs / Self Help Groups / Micro
credit
● Loans provided by banks to NGOs/SHGs for on-
lending to SHG / members of SHGs / discrete
individuals or small groups which are in
the process of forming into SHG.
● Lending to SHGs is classified as bank’s
lending to weaker section.
● Micro credit granted directly or indirectly
is priority sector finance.

12. Food & Agro Based Processing Sector
● Fruit & vegetable processing industry.
● Food grain milling industry.
● Dairy products
● Processing of poultry & eggs , meat
products.
● Fish processing

12. Food & Agro Based Processing Sector
● Bread, oilseeds, meals, ready to eat food
products etc.
● Aerated water, soft drinks & other
processed foods,
● Technical advice & assistance to food
processing industry.
All have a ceiling of investment in plant &
machinery up to Rs. Five crores.

13. Software Industry
Loans to software industry with credit limit
up to Rs One crore from the banking industry
to be included under priority sector
lending.
14. Leasing & Hire Purchase
Leasing, hire purchase para-banking
activities undertaken departmentally by
banks are classified as priority sector, if
final beneficiary satisfies criteria laid
down by RBI for this sector.

15. Loans to urban poor indebted to Non-
Institutional lenders.
 Loans to distressed urban poor to prepay
their non-institutional lenders are
included in priority sector.
 Banks to obtain appropriate collateral
or group security & follow guide lines
of their Board of Directors.

11.3 Targets for Priority Sector Lending by
Scheduled Commercial Banks { Excluding RRBS]
Main targets
☼ Scheduled banks are to expand credit to
priority sector and ensure that advances
to this sector constitute 40% of their
total net credit.
☼ 18% of the net credit goes to
agricultural sector and 10% to the
weaker section. 1% is given under
differential rate of interest scheme.

Sub targets
☼ Out of 18% to agricultural sector,
indirect finance cannot be more than
4.5%. Excess, if any, over 4.5% cannot
be included for limit of 18%, but can be
included in overall limit of 40%.
☼ Advances to weaker section need to reach
a level of 25% of priority sector
advances or 10% of net bank credit.

Sub targets contd.
☼ Not less than 40% of the total advances
granted under DRI scheme have to go to
scheduled caste / tribes.
☼ 66.6 % of DRI advances should be granted
through rural and semi urban branches.

Sub targets contd.
☼ 40% of the total credit to small scale
industry has to go to cottage
industries, KVI, artisans & tiny
industries with investment in machinery
up to Rs Five lakhs.

Sub targets contd.
☼ 20 % of total credit to small scale
industries should be granted to SSI
units with investment between Rs 5 to 25
lakhs.
☼ Balance 40% can go to SSI units with
investments over Rs. 25 lakhs.

11.4 Targets for Foreign Banks
☼ Minimum lending to priority sector by
foreign banks is fixed at 32%.
☼ As they do not have branches in rural
India, they can include their export
credit in this limit.
☼ Within this limit at least 10% advances
be to the small scale industries & 12%
to export credit.

11.5 Deposits by Foreign Banks with SIDBI
Towards Shortfall in Priority Sector
Lending
☼ In case there is shortfall to attain
stipulated targets / sub targets,
foreign banks are required to deposit
amount equal to shortfall with SIDBI.
☼ Deposits are maintained for a period of
three years &, depending upon the
volume of short fall, at the bank rate
to bank rate less three percentage
points. See table next-

11.5 Deposits by Foreign Banks with SIDBI
Towards Shortfall in Priority Sector
Lending
SHORTFALL RATE OF INTEREST
▼ Less than 2% points Bank Rate
▼ 2 and above but less than
5 % points Bank Rate less 1%
▼ 5 and above but less than
9 % points Bank Rate less 2%
▼ 9 % points and above Bank Rate less 3%

11.5 Deposits by Foreign Banks with SIDBI Towards
Shortfall in Priority Sector Lending
▼ Even if the foreign banks have fulfilled
overall target but not sub targets,
deposits have to be arranged to make
good shortfalls in each sub target.
▼ In case bank is unable to fulfill both
main & sub targets then higher of
[i] aggregate of shortfalls in sub targets or
[ii] the shortfall in overall target
needs to be deposited.

11.6 Contribution by Banks to Rural
Infrastructure Development Fund [RIDF]
▼ Unlike foreign banks, domestic banks
unable to attain the set targets for
priority sector are required deposit amounts
in RIDF established with NABARD.
▼ Amounts to be deposited, are decided
Rate of interest, after Union
Period of deposits. budget each
year

11.7 Mode of Disbursement of Loan
Banks are permitted to disburse all loans to
farmers in cash in order to
provide wider dealer choice.
eliminate undesirable practices.
foster an environment of trust.
Banks continue to obtain receipts from
borrowers for advances.

11.8 Repayment Schedule
Repayment schedule has to be drawn in a
systematic manner after considering
● sustenance requirements
● surplus generating capacity
● the break even point
● the life of the asset
In case of defaults in repayment caused by
natural calamities advances be converted
into medium term loans.

11.9 Rates of Interest.
The rates of interest on various categories
of priority sector
advances will be as per RBI
directives from time to time.

11.10 Penal Interest
Is chargeable in case of default or non
submission of financial statements &
returns.
The rates are to be decided by the Board of
Directors of each Bank.
Penal interest is not chargeable to loans up
to Rs. 25,000/- in priority sector.

11.11 Service Charges / Inspection Charges
☺ Service or inspection fees are not
chargeable to loans up to Rs. 25,000/- in
priority sector.
☻ For loans > Rs 25,000/- authority to
determine fees rests with the Boards of the
banks.

11.12 Insurance Against Fire & Other Risks
☻ Is waived in cases of all advances up to
Rs 10,000/- in the priority sector and
advances to SSI up to Rs 25,000/-.
☻ If the provision of any law makes
insurance compulsory [as in case of
vehicles] this relief is not applicable.

11.13 Photographs of Borrowers
Banks are free to demand photographs of
borrowers for identification.
This requirement must not delay the
process of loan disbursement.
The costs be borne by banks when
borrower happens to belong to a ‘weaker
section’.
The End ! Next, Chapter 12,
‘ Rupee Export Credit’

Raj Jaiswal - priority sector lending.pdf

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